Local Virtualization Firm Hoping to Ride the Wave of VMware’s Success

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“Virtualization” and “sky high prices” seem to be going hand-in-hand this week.

First came EMC (NYSE: EMC) subsidiary VMware’s mind-boggling IPO on Tuesday, the hottest stock debut since Google. Then, yesterday, came word that Citrix, a business software company that makes applications running on backend servers appear as if they are running on customers’ desktops, had agreed to pay $500 million for VMware rival XenSource—a company that most observers still don’t think has $5 million in sales.

All of which might well be great news for local virtualization firm Virtual Iron. The XenSource acquisition—and its lofty price tag—had been rumored in the software industry for a few days, but most in the industry had dismissed it as an exaggeration, says Tim Walsh, director of product marketing for the Lowell, MA, company. Until the official Citrix announcement, that is. “Although that number had been leaked, I think nobody really believed it,” Walsh says. “Everyone figured it was just hype, given the numbers around the VMware IPO. So the deal itself wasn’t a surprise, but the amount was. It was breathtaking.”

But regardless of whether VMware’s stock (NYSE: VMW) stays in the stratosphere or Citrix gets its money’s worth, all the dollar signs have focused new attention on virtualization, a technology that only 3 to 5 percent of enterprises have yet adopted, according to industry research firm IDC. And prices—of software, not stock—may be the factor that ultimately swings some of the attention away from VMware and toward companies like Virtual Iron.

Virtualization is a technique for running multiple applications on multiple operating systems on a single server. It saves money by allowing businesses to get more out of their server hardware. But it doesn’t come cheap. Buying the enterprise version of VMware’s Infrastructure 3 virtualization software for two processors will set you back $5,750; Virtual Iron, by contrast, charges $499 per processor, and will do “about 90 percent of what VMware does,” according to Walsh.

With VMware penetrating only about 5 percent of the market, “There is a tremendous opportunity for further adoption of server virtualization,” says Walsh. “But all of our market research points to one thing—that price is the biggest obstacle.” Virtual Iron aims its product—which, like XenSource’s software, is partly based on a free open-source virtualization package called Xen—at price-sensitive, small- to medium-sized organizations that may have only dozens of servers, not hundreds. Among the company’s customers: Priceline.com, the Charlotte Observer newspaper, and the City of Evanston, IL.

Walsh says all the attention on VMware and the XenSource acquisition will ultimately bring in more customers for Virtual Iron (which has venture investment from Highland, Matrix, Goldman Sachs, Intel Capital, and SAP Ventures). “It’s been great because it has put a spotlight on the space and on what the technology does. This is the kind of thing that helps take technology into the mainstream, and we are going to benefit from that as much as anybody, because of the market we’re targeting—the mid-market where companies are not early adopters.”

Fair enough—but I asked Walsh whether VMware’s success and the windfall at XenSource also has the folks at Virtual Iron musing about faster ways to make money, like being acquired themselves. “Our CEO [John Thibault] does a really good job of keeping us focused away from things like that,” Walsh responded. “We had a company meeting this afternoon, and John talked about how we have got to take care of our customers, create additional awareness in the marketplace, and build the ecosystem.

“Those are things that make you relevant and strong. Events like the VMware IPO and the Citrix acquisition make you realize you’re in a hot space, that you’re doing important work. But when you start worrying about that stuff too much, you take your eye off the ball.”